San Jose, Calif.-based Calpine has incorporated a spark spread hedge into a power plant refinancing package, a feature that ensures debt interest will be paid even if generation margins deteriorate for the gas-fired generation portfolio. Bankers said the power plant financing is likely the first of its kind to strip out commodity price risk through the use of a spark spread floor. The spark spread is the difference between the price of gas and electricity.
The spark spread derivative is being used to enhance a USD750 million package of first- and second-lien term loans and floating rate notes placed by Goldman Sachs in the institutional debt market late last week, according to bankers. "It's a way to provide additional assurance that debt payments will be made," said John Woodley, managing director at Morgan Stanley, which also has been pitching this type of deal.
Katherine Potter, spokeswoman at Calpine, declined comment and officials at Goldman Sachs did not return calls.
The logic of the structure runs that while merchant gas-fired plants can always sell their power, their ability to operate profitably and cover any associated debt depends on them being able to source gas at considerably cheaper levels than they can sell their output. Employing a spark spread floor means borrowers can ensure there should be enough cash to cover interest payments.
